By Zorast Wadia & Charles J. Clark

Corporate pension plans experienced a win-win year in 2021, with an investment gain of 8.33% alongside increasing discount rates and a cumulative liability return (e.g., the projected benefit obligation decrease) of -1.96%. The result was a staggering $183 billion improvement in the funded status deficit of the Milliman 100 Pension Funding Index (PFI), the second-largest in the report’s history (exceeded only by the $204 billion improvement in 2013).

In 2021, corporate pension asset returns continued their upward trajectory seen in 2020. Unlike 2020, however, discount rates also increased overall for the year, driving down plan liability valuations. The PFI discount rate rose 34 basis points in 2021, ending at 2.80% as of December 31, compared to 2.46% at the end of 2020. For reference, the discount rate at year-end 2020 was the lowest year-end discount rate recorded in the 21-year history of the PFI. The year 2021 marks the fourth time discount rates have risen in the last 10 years.

Assets outperformed expectations during 2021, posting a cumulative annual return of 8.33%, which comes on the heels of 2020’s strong investment gain of 11.56%. For comparison, the 2021 Milliman Pension Funding Study (PFS) reported that the monthly median expected investment return during 2020 was 0.50% (6.2% annualized). Similar to 2019 and 2020, 2021 was very favorable for equity investment classes. Investment returns have been above PFS expectations in seven of the last 10 years.

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